Questor share tip: Go-Ahead in good shape after its roller-coaster ride

The company said that it expects first-half operating profit to nudge ahead of its expectations, driven by its rail unit, but it maintained its full-year targets given the economic uncertainty.

This followed a roller-coaster year for the sector, as valuations were hit hard by worries over reduced subsidies from central government. However, things did not turn out too bad in the end - and bus and rail groups such as Go-Ahead remain solid dividend plays.

The Comprehensive Spending Review was expected by many to result in a slashing of bus subsidies, but this did not happen. This is to ensure that services are run on routes that would otherwise not have been viable.

The Bus Service Operator Grant, which refunds part of fuel duty, will be maintained until 2012 and then cut by 20pc over three years. This is a far better outcome than expected.

Rail fares were also allowed to rise to 3pc above the retail price index (RPI) for the three years from 2012 to support investment in the networks. The rise is based on RPI in July, which was 4.8pc.

All of this means that the company's dividend looks secure and the shares are yielding a very healthy 6.3pc. "Our cashflow and balance sheet remains strong and underpins our dividend policy," Go-Ahead said.

Passenger journeys at its bus operations are rising. In deregulated bus operations, the underlying passenger and revenue growth trends of 3pc to 4pc seen in the first quarter had continued.

First-half mileage in regulated London bus operations is expected to be similar to last year and revenue to be around 7pc lower. This was expected because of previously announced lower contract prices.

Fuel costs are fully hedged for this year at 41p a litre compared with 47p last year, which will lead to a saving in fuel costs of £3.5m compared with last year.

Half-year revenue in its rail unit Southern is expected to be around 6pc higher than last year because of a 4pc growth in passenger journeys.

Revenue growth in the London Midland franchise is expected to be around 7pc for the first half.

Nick Swift, finance director, said he would consider bidding for the East Anglia railway franchise. "We prefer higher-density, commuter-type of operations. East Anglia fits into that category, so East Anglia would be of interest," Mr Swift said. The franchise is currently run by National Express but it expires next year.

Obviously there are pressures on the business in the short term as economic activity is not out of the woods and the network still needs substantial investment, but things are not as dire as the market feared a few months ago. The most important thing to note is that the dividend does not appear at risk – and this is the main reason to own the shares. Investors who bought in on the initial recommendation should have locked in a yield of 6.6pc, which is exceptional.

The shares were first recommended at £12.15 on June 11 and are now 5pc ahead compared with the FTSE 100 up 14pc.

Trading on a June 2011 multiple of 11.4 times, the shares remain a buy for the income.